Financial Crisishttp://www.newgeography.com/category/story-topics/financial-crisis
The taxonomy view with a depth of 0.enSeven Years Ago, Wall Street was the Villain. Now it Gets to Call the Shotshttp://www.newgeography.com/content/004820-seven-years-ago-wall-street-was-villain-now-it-gets-call-shots
<p>The recent passage by Congress of <a href="http://money.cnn.com/2014/12/12/investing/congress-wall-street/" title="" data-link-name="in body link" data-component="in-body-link">new legislation</a> favourable to loosening controls on risky Wall Street trading is just the most recent example of the consolidation of plutocratic power in Washington. The new rules, written largely by Citibank lobbyists and embraced by the Obama administration, allow large banks to continue using depositors&rsquo; money for high-risk investments, the <a href="http://www.forbes.com/sites/stevedenning/2014/12/12/with-dodd-frank-rollback-the-big-bad-banks-are-back" title="" data-link-name="in body link" data-component="in-body-link">very pattern</a> that helped create the 2008 financial crisis.</p>
<p>This move was supported largely by the establishment in each party. Opposition came from two very different groups: the Tea Party Republicans, who largely represent the views of Main Street businesses, and a residue of old-line progressive social democrats, led by Massachusetts Senator <a href="http://www.theguardian.com/theobserver/2014/dec/28/elizabeth-warren-can-scourge-wall-street-make-to-white-house" title="" data-link-name="in body link" data-component="in-body-link">Elizabeth Warren</a>.</p>
<p>Support for big finance is no surprise from Republicans, who are used to worshipping at the altar of Wall Street. But the suborning of &ldquo;progressivism&rdquo; to Wall Street has been a permanent feature of this administration. From the onset of his presidential run, Barack Obama had strong ties to Wall Street grandees. <em>New York Times</em> Wall Street maven Andrew Ross Sorkin <a href="http://dealbook.nytimes.com/2008/04/22/obama-and-the-hedge-fund-factor" title="" data-link-name="in body link" data-component="in-body-link">noted</a> in 2008 how Obama had &ldquo;nailed down the hedge fund vote&rdquo;.</p>
<p>The ultra-rich so backed the president that, at his first inaugural, noted one sympathetic chronicler, the biggest problem for donors was finding parking space for their private jets. Since then, despite occasional flights of populist rhetoric, the president has kept close ties with top financial firms, including the well-connected Jamie Dimon, chairman of JP Morgan, <a href="http:" title="" data-link-name="in body link" data-component="in-body-link">often called</a> Obama&rsquo;s &ldquo;favourite banker&rdquo;. He appears to have been instrumental in getting Democrats to support the recent loosening of financial controls on big banks.</p>
<p>These Wall Street connections have continued to play dividends for the president, in terms of <a href="http://www.wsj.com/articles/SB10001424052702303933404577500810740985338" title="" data-link-name="in body link" data-component="in-body-link">contributions</a>. The financiers benefited from Obama&rsquo;s choice of financial managers, such as former treasury secretary Tim Geithner, widely known as a reliable ally of the financial sector. (He liked to explain his support by equating its importance to that of the technology and manufacturing industries.) To no sensible person&rsquo;s surprise, Geithner, when he left the Treasury last winter, found his reward by joining a large <a href="http://www.wsj.com/news/articles/SB10001424052702304243904579200323813063730?mod=WSJ_hp_LEFTWhatsNewsCollection&amp;cb=logged0.4154174779037729" title="" data-link-name="in body link" data-component="in-body-link">private equity firm</a>. (By way of completing the circle, Geithner&rsquo;s successor, Jacob Lew, used to work for Citibank.)</p>
<p>The Justice Department has also been cosy with the plutocracy. Attorney general Eric Holder allowed Wall Street a kind of &ldquo;get out of jail free card&rdquo; by failing to launch tough prosecutions of the grandees. In contrast to the situation under previous administrations, both Republican and Democratic, the financial plutocrats have not been forced to pay for their numerous depredations. Instead, most prosecutions have been <a href="http://www.nytimes.com/2012/02/03/business/sec-is-avoiding-tough-sanctions-for-large-banks.html?pagewanted=all&amp;_r=0" title="" data-link-name="in body link" data-component="in-body-link">aimed</a> at low-level traders, Ponzi schemers or inside traders.</p>
<p>So if you still think 2008 and the financial crisis changed everything, still think of it as a progressive triumph, think again. Instead of the brave new world of reformed finance, what&rsquo;s been created in the US is something close to a perfect world, policy-wise, for the plutocrats. The biggest rewards have come from an economic policy, backed by the Federal Reserve and the administration, that has maintained ultra-low interest rates. This has forced investors into the market, at the expense of middle-class savers, particularly the elderly. The steady supply of bond purchases has essentially given free money to those least in need and most likely to do damage to everyone else.</p>
<p>The results make a mockery of the Democrats&rsquo; attempts to stoke populist sentiments. In this recovery, the top 1% gained 11% in their <a href="http://economix.blogs.nytimes.com/2013/09/10/the-rich-get-richer-through-the-recovery/?_r=0" title="" data-link-name="in body link" data-component="in-body-link">incomes</a> while the other 99% experienced, at best, stagnant incomes. As one writer at the Huffington Post put it: &ldquo;The rising tide has lifted fewer boats during the Obama years – and the ones it&rsquo;s lifted have been mostly yachts.&rdquo; If this had occurred during a Republican administration, many progressives would have been horrified. But Democrats, led by New York senator Charles Schumer, Wall Street&rsquo;s consigliere on the Hill, have been as complicit as Republicans in coddling Wall Street. Democrats, for example, despite their rhetoric about inequality and fairness, have refused to challenge the outrageous discount on taxes for capital gains as opposed to income. A successful professional making $300,000 a year is often taxed at rates <a href="http://www.nydailynews.com/news/national/payroll-tax-rise-article-1.1231335" title="" data-link-name="in body link" data-component="in-body-link">twice as high</a> as the rate paid by hedge fund investors, venture capitalists, tech entrepreneurs and Wall Street stock jobbers.</p>
<p>At the same time, the Obama years have been something of a disaster for Main Street, where most Americans work. A 2014 Brookings report revealed that small business &ldquo;dynamism&rdquo;, measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter of a century.</p>
<p>Small banks, long a critical source of funding for small businesses, have also been pummelled by the very regulatory regime that also allows mega-banks to enjoy both &ldquo;too big to fail&rdquo; protections as well as their sacred right to indulge their most cherished risk-oriented strategies. In 1995, the assets of the six largest bank holding companies accounted for 15% of gross domestic product; by 2011, aided by the massive bailout of &ldquo; big banks&rdquo;, this percentage had soared to 64%.</p>
<p>These trends do much to explain what happened in the recent midterm elections, which saw a massive shift of middle- and working-class voters, especially whites, to the Republicans. Increasingly, Americans suspect that the economic system is rigged against them. By a margin of two to one, according to a 2013 Bloomberg <a href="http://www.bloomberg.com/news/2013-12-11/americans-say-dream-fading-as-income-gap-hurts-chances.html" title="" data-link-name="in body link" data-component="in-body-link">poll,</a> adults feel the American Dream is increasingly out of reach. This pessimism is particularly intense among white working-class voters and large sections of the middle class .</p>
<p>The other major cause for the Democratic demise in November was the low turnout among minority voters. They certainly have ample reason to be indifferent. Both African American and Latino incomes have declined during the current administration, in large part because neither group tends to benefit much from the appreciation of stocks and high-end real estate.</p>
<p>In caving in to Wall Street and its economic priorities, members of both parties have demonstrated where their primary loyalties lie. Amid the obscene levels of compensation going to the financial grandees, it seems the ideal time for politicians, right or left, to challenge Wall Street&rsquo;s control of Washington. High finance has so devastatingly rocked the world of the middle and working classes. Voters, it might be thought, now need leaders who will take these grandees down a notch or two.</p>
<p><em>This piece first appeared at The Guardian.</em></p>
<p><em>Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, <a href="http://www.amazon.com/gp/product/091438628X/ref=as_li_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=091438628X&amp;linkCode=as2&amp;tag=newgeogrcom-20&amp;linkId=CAGQAHAYTUPQIPY2">The New Class Conflict</a> is now available at <a href="http://www.amazon.com/gp/product/091438628X/ref=as_li_tl?ie=UTF8&amp;camp=1789&amp;creative=390957&amp;creativeASIN=091438628X&amp;linkCode=as2&amp;tag=newgeogrcom-20">Amazon</a> and <a href="http://www.telospress.com/store/#!/~/product/category=4186633&amp;id=38310927">Telos Press</a>. He is author of <a href="http://www.amazon.com/gp/product/0375756515/ref=as_li_ss_tl?ie=UTF8&amp;tag=newgeogrcom-20&amp;linkCode=as2&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0375756515">The City: A Global History</a> and <a href="http://www.amazon.com/gp/product/B005B1BN90/ref=as_li_ss_tl?ie=UTF8&amp;tag=newgeogrcom-20&amp;linkCode=as2&amp;camp=1789&amp;creative=390957&amp;creativeASIN=B005B1BN90">The Next Hundred Million: America in 2050</a>. His most recent study, <a href="http://www.newgeography.com/content/003133-the-rise-post-familialism-humanitys-future">The Rise of Postfamilialism</a>, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.</em></p>
<p><em><a href="http://www.bigstockphoto.com/image-4242491/stock-photo-wall-street-bull">Wall Street bull photo</a> by Bigstockphoto.com.</em></p>
http://www.newgeography.com/content/004820-seven-years-ago-wall-street-was-villain-now-it-gets-call-shots#commentsFinancial CrisisMiddle ClassPoliticsPolicySun, 04 Jan 2015 17:07:59 -0500Joel Kotkin4820 at http://www.newgeography.com10 Steps to Financial System Stability: Lessons Not Learnedhttp://www.newgeography.com/content/004778-10-steps-financial-system-stability-lessons-not-learned
<p>Recently, <a href="http://www.bloombergview.com/articles/2014-09-26/the-secret-goldman-sachs-tapes">BloombergView writer Michael Lewis</a> called attention to tape recordings made by a Federal Reserve Bank of New York bank examiner who was stationed inside Goldman Sachs&rsquo; offices for several months during 2011-2012. She released the tapes to <a href="http://www.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra">This American Life</a> who aired her story on September 26, 2014. Every media article I&rsquo;ve seen on this begins with a prelude warning how complicated and hard to follow the story will be. Regular readers of New Geography are several steps ahead in their understanding of these <a href="http://www.newgeography.com/content/00679-story-financial-crisis-burnin%E2%80%99-down-house-with-good-intentions-and-lots-greed">causes and consequences of the financial crisis</a>. If you are new here, you can follow the links in this piece to earlier NG articles.</p>
<p>Central to the theme of the story is the release of a <a href="https://www.documentcloud.org/documents/1303305-2009-08-18-frbny-report-on-systemic-risk-and.html">2009 report by Columbia University</a> professor David Beim on why the Federal Reserve – especially the New York office which <a href="http://www.newgeography.com/content/00691-geithner-wall-streets-lapdog">was supposed to be watching the banks</a> – failed to act to prevent the crisis. Beim listed about a dozen &ldquo;Lessons Learned&rdquo; by bank supervisors <em>after</em> the financial crisis. In this article, we list the Lessons <em>not</em> Learned <em>before</em> the financial crisis. These lessons come from decades-old studies of financial regulation from around the world. If any US policy makers had paid attention in school, we would have avoided the global financial collapse of 2008. The United States – which was at the center of that storm – had been preaching these steps to emerging market nations for decades. Unfortunately, they just were not following them for us. In the fall of 1998, those emerging market economies seriously threatened the financial stability of the West. In the fall of 2008, it was the West that brought the threat upon itself and the rest of the world.</p>
<p><strong>Four Policies, Five Tasks and One Idea</strong></p>
<p><em>Policies not implemented</em></p>
<p><em>1. Have private, independent rating agencies</em>: US rating agencies were technically independent because they were not owned by the government. However, with the creation by the Securities and Exchange Commission (SEC) of the &ldquo;Nationally Recognized Statistical Rating Organization&rdquo; or NRSRO designation, three big credit rating agencies were the only ones accepted for use to meet regulatory requirements – they were issuing 98% of all credit ratings. This gave a government imprimatur to selected businesses, creating undue reliance by financial markets globally. By 2008, the &ldquo;NRSRO&rdquo; term appeared in more than 15 SEC rules and forms (not including those directly used for NRSROs), plus rules in all 50 states. NRSROs are also referenced in 46 Federal Reserve rules and regulations. Even though the SEC sanctioned and required the use of the NRSROs they had no say in the process used to establish the ratings.</p>
<p>Despite even pseudo-independence from the government, the NRSROs were not independent of the financial institutions that paid them to issue credit ratings. The government sanction gave them more power to wield against – or in favor of – the banks and companies they rated. They made money consulting for the same firms, resulting in <a href="http://www.newgeography.com/content/002516-occupy-wall-street-about-d-time">pressure to rate bonds higher</a> than they should have been rated.</p>
<p><em>2. Provide some government safety net but not so much that banks are not held accountable:</em> Many banks – and all of the New York Feds &ldquo;primary dealers&rdquo; – achieved &ldquo;too big to fail&rdquo; status through the Wall Street Bailout Act. A few were allowed to fail in the months leading up to the passage of the Bailout – most notably Lehman Brothers – in what amounted to the federal government picking winners and losers without accountability. The <a href="http://www.newgeography.com/content/001489-financial-crisis-too-late-change">Federal Deposit Insurance Corporation was nearly bankrupted</a> in late 2009, removing the safety net that protected depositors. The FDIC was so <a href="http://www.huffingtonpost.com/2009/08/26/as-fdics-funds-dwindle-re_n_269820.html">depleted by the epidemic</a> of collapsing banks, they eased the rules on buyers of failing banks, opening the door for hedge funds and private investors to gain access to &ldquo;bank&rdquo; status – and the protections that go with it. At the end of September 2009, the FDIC&rsquo;s fund was already negative by $8.2 billion, a decrease of 180% in just three months. FDIC is projected to remain negative over the next several years as they absorb some $75 billion in failure costs just through the end of last year.</p>
<p>At the same time, bailed-out banks, brokers and private corporations received additional financial support from the Federal Reserve in a move unprecedented in US history. Billions of dollars in loans were made to the banks without proper documentation. The lack of transparency in the process used by the Treasury to decide who would receive bailout funds and what the recipients have done with the hundreds of billions of dollars was the subject of <a href="http://www.newgeography.com/content/002595-suppressing-news-the-real-cost-wall-street-bailout">a GAO audit we wrote about</a> in 2011.</p>
<p><em>3. Allow very little government ownership and control of national financial assets</em>: Four years after the crisis, the U.S. Treasury still owned more than half of American International Group, Inc., (AIG). AIG was the world&rsquo;s largest insurance company – giving the government ownership in international financial assets, too. The <a href="http://www.newgeography.com/content/00712-geithner%E2%80%99s-reforms-more-power-center-may-appeal-europeans-but-won%E2%80%99t-work-us">U.S. government took ownership positions</a> in virtually every major financial institution during the bailout, plus some non-banks that had lending arms (like General Motors Acceptance Corporation). The GAO audit of the Fed shows we loaned money to and took ownership stakes in a slew of non-regulated businesses like Target and Harley Davidson. The lack of transparency in these transactions is dangerous. Austrian Economist Ludwig von Mises warned decades earlier that market data could be &ldquo;falsified by the interference of the government,&rdquo; with misleading results for businesses and consumers. </p>
<p><em>4. Allow banks to reduce the volatility of returns by offering a wide-range of services</em>: Until the passage of the <a href="http://www.newgeography.com/content/003170-the-swaps-damocles"><em>Dodd-Frank Wall Street Reform and Consumer Protection Act</em></a> in 2010, banks were restricted to buying securities defined as investment grade by the NRSROs. Given what we now know about these ratings and the actual riskiness of some AAA-rated investments, the requirement actually made bank investments more dangerous. The process followed in the years (even decades) leading up to the collapse of credit markets was not one that would meet the definition of &ldquo;unrestricted.&rdquo; Although there appeared to be a wide range of activities available to US banks, the restriction on credit ratings would eventually increase volatility by concentrating risk instead of dispersing it. Just because a bank can deal in a particular investment does not mean that they should.</p>
<p>The steps outlined here are a comprehensive program, not a menu of options. There is no sense allowing banks wide latitude to make risky investments if proper supervision and enforcement is not in place. That leads us to the next steps: the necessary tasks for prudent regulation.</p>
<p><em>Tasks Not Taken</em></p>
<p>Ten years before the most recent financial crisis (1998), the international financial system had already entered a new era. Speaking at the Western Economics International Association in 2001, Lord John Eatwell said, &ldquo;The potential economy-wide inefficiency of liberalised financial markets was indisputable.&rdquo; Eatwell had been writing about these problems for decades.</p>
<p><em>5. Require financial market players to register and be authorized</em>: US regulators failed to act on establishing registration for hedge funds, failed to establish requirements for registering who can issue collateralized mortgage obligations (mortgage-backed securities), and failed to act on loopholes in regulations prohibiting insurance companies like AIG from issuing credit default swaps through subsidiaries – the list goes on. Dodd-Frank established the Financial Stability Oversight Council to designate &ldquo;<a href="http://www.newgeography.com/content/002755-the-next-public-debt-crisis-has-arrived">Systemically Important</a> Nonbank&rdquo; – yet another government imprimatur for unregulated entities. Instead of making sure only authorized businesses perform financial activity they are only making sure those big financial firms are bailed-out faster in the future.</p>
<p><em>6. Provide information, including setting standards, to enhance market transparency</em>: There were no standards for issuing derivatives. Nor for collateralized debt like the mortgage-backed bonds where there was no link from homes/real estate. Because the financial issuers had no standard for reporting changes in ownership to land offices who keep track of liens on homes (usually county-level property office), probably <a href="http://www.newgeography.com/content/00734-mortgage-backed-securities-13-not-backed">one-third of the bonds</a> the Fed is buying in their monthly &ldquo;quantitative easing&rdquo; purchases are <a href="http://www.newgeography.com/content/00692-junk-by-any-other-name-would-smell">truly worthless</a>.</p>
<p><em>7. Routinely examine financial institutions to ensure that the regulatory code is obeyed</em>: Without registration and standards, of course, they can be no surveillance by any regulator. Congress admitted that while &ldquo;most of the largest, most interconnected, and most highly leveraged financial firms in the country were subject to some form of supervision&rdquo; it proved to be &ldquo;<a href="http://www.newgeography.com/content/001519-financial-reform-or-con-game">inadequate and inconsistent</a>.&rdquo; The story described to <em>This American Life</em> by Carmen Segarra is not news – it is only one more in a long history of problems.</p>
<p><em>8. Enforce the code and discipline transgressors</em>: Despite existing rules allowing regulators to prohibit offenders from engaging in future financial activity, only minimal fines have been issued. &ldquo;Too big to fail&rdquo; practices allow regulators to &ldquo;look the other way&rdquo; on money laundering and other issues that put our national security at risk. According to the Special Inspector General&rsquo;s Quarterly Report (September 2012), the &ldquo;Treasury [is] selling its investment in banks at a loss, sometimes back to the bank itself&rdquo; allowing even banks who have the ability to pay to get out of the program for less than they owe. Those responsible for creating the situation that required the Bailout have <a href="http://www.newgeography.com/content/00576-this-perp-walk-needs-handcuffs">not been called to discipline</a>. Quite the contrary, many were paid elaborate bonuses at the same time their financial institutions were receiving bailout funds.</p>
<p><em>9. Develop policies that keep the regulatory code up to date</em>: More than a decade before the crisis, <a href="http://www.newgeography.com/content/001256-401k-9mm-666">Brooksley Born</a> raised enormous concerns over derivatives in the US – including credit default swaps – during her tenure as chair of the Commodity Futures Trading Commission (1996-1999). Both the SEC and the Federal Reserve Board objected to her ideas. On June 1, 1999, Congress passed legislation prohibiting such regulation, ushering in a long period of growth in the unregulated market. Five years after the financial crisis began, rules are still not implemented. AIG became subject to Federal Reserve supervision only in September 2012 when they bought a savings and loan holding company. By October 2, 2012, AIG had been notified that it is being considered for the &ldquo;systemically important&rdquo; designation – the &ldquo;too big to fail&rdquo; stamp of approval for everything they do.</p>
<p><em>One Way Out</em></p>
<p>Which leads us to one old idea that every student who ever took economics 101 should remember:</p>
<p><em>10. Create specialized financial institutions: </em>In the context of what we know about the policies and tasks that support financial stability, only one additional factor needs to be considered, and that is an old theory on the economic gains from specialization. In <em>The Wealth of Nations</em>, Adam Smith told us that the bigger the market the greater the potential gains from specialization. With equity markets alone reaching a global value of $46 trillion, the potential gains are enormous. </p>
<p>Peter Drucker made this point on specialization in 1993 in his prophetic book &ldquo;<a href="http://www.amazon.com/Post-Capitalist-Society-Peter-F-Drucker/dp/0887306616/ref=tmm_pap_swatch_0?_encoding=UTF8&amp;sr=8-1&amp;qid=1412003019">Post-Capitalist Society</a>.&rdquo; While diversification is good for a portfolio of financial investments, in large systems it means &ldquo;splintering.&rdquo; In a system as large as financial markets, diversification &ldquo;destroys the performance capacity.&rdquo; If financial institutions are tools to be used in furthering the efforts of the broad economy, then as Drucker writes &ldquo;the more specialized its given task, the greater its performance capacity&rdquo; and therefore the greater the need for specialization.</p>
<p>The rise of the financial sector has been tied to economic expansion throughout our modern business history. The more robust the flow of finance, the more robust is the potential for economic activity. Greater efficiency in capital markets can lead directly to <a href="http://www.amazon.com/Mergers-Efficiency-Institute-Financial-Innovation/dp/1402070152/ref=sr_1_2?ie=UTF8&amp;qid=1412003097&amp;sr=8-2&amp;keywords=susanne+trimbath">greater efficiency in industry</a>. Our economy, our livelihood and our well-being are inextricably related to finance at home and around the world. It is now necessary to return to the basics and recognize the long run value of economically efficient specialization. We are living in the post-capitalist society described by Drucker. US regulators have been overly focused on the financial theory of portfolio diversification, ignoring the economic importance of gains through specialization. Drucker&rsquo;s forecast was accurate: &ldquo;Organizations can only do damage to themselves and to society if they tackle tasks that are beyond their specialized competence.&rdquo;<strong></strong></p>
<p>None of this is to say that our long-term failure is guaranteed. What happens next will be an experiment on a grand scale. The Financial Crisis Inquiry Commission concluded: &ldquo;The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.&rdquo; Carmen Segarra <a href="http://www.newgeography.com/content/001914-the-financial-crisis-continues-be-inside-job">did not tell us anything new</a>: hopefully what she told us – and what <a href="http://www.propublica.org/article/ny-fed-fired-examiner-who-took-on-goldman">ProPublica</a> and others are writing about it – will help a wider public to understand the problem.</p>
<p><em>Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath&rsquo;s credits include appearances on national television and radio programs and the Emmy® Award nominated Bloomberg report&nbsp;<a href="http://www.youtube.com/playlist?list=PL7CFF70F2937191E8&amp;feature=plcp">Phantom Shares</a>. She appears in four documentaries on the financial crisis, including&nbsp;<a href="http://stockshockmovie.com/">Stock Shock: the Rise of Sirius XM and Collapse of Wall Street Ethics</a>and the newly released&nbsp;<a href="http://thewallstreetconspiracy.com/">Wall Street Conspiracy</a>. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute. She served as Senior Advisor on United States Agency for International Development capital markets projects in Russia, Romania and Ukraine. Dr. Trimbath teaches graduate and undergraduate finance and economics.</em></p>
<p><em><a href="http://www.bigstockphoto.com/image-4242491/stock-photo-wall-street-bull">Wall Street bull photo</a></em><em>&nbsp;</em><em>by Bigstockphoto.com.</em></p>
http://www.newgeography.com/content/004778-10-steps-financial-system-stability-lessons-not-learned#commentsFinancial CrisisPoliticsPolicyThu, 20 Nov 2014 00:38:28 -0500Susanne Trimbath4778 at http://www.newgeography.comApocalypse Soon? Uneasiness with The Economyhttp://www.newgeography.com/content/004521-apocalypse-soon-uneasiness-with-the-economy
<p>Seven in 10 Americans say the country is on the wrong track. Americans are unhappy, worried and pessimistic, and their spending is down <a href="http://www.reuters.com/article/2014/08/29/us-economy-consumer-idUSKBN0GT1DS20140829">according to a University of Michigan report</a>. But the same report shows that consumer sentiment is up. Consumer confidence is up, according to the <a href="https://www.conference-board.org/data/consumerconfidence.cfm">Conference Board</a>, and our own <a href="http://consumerdemand.com">Consumer Demand Index</a> indicates that spending plans are up.</p>
<p>What accounts for this dichotomy? Perhaps it could be <a href="http://beforeitsnews.com/education/2013/01/america-has-fallen-victim-to-the-normalcy-bias-do-you-suffer-from-normalcy-bias-video-2442598.html">the normalcy bias</a>, a desire for “normalcy” so strong as to feed a willingness to overlook contrary evidence. Or perhaps our uneasiness is an example of the “wisdom of crowds”, <a href="http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds">James Surowiecki's theory</a> that in aggregate, opinions of a wide cross-section of people are more accurate than those of experts. </p>
<p>Frankly, I'm uneasy, unhappy, worried, and pessimistic.</p>
<p>The protracted and uneven recovery from the Great Recession has led most Americans to conclude that the US economy has undergone a permanent change for the worse, according to a new national study by scholars at <a href="http://news.rutgers.edu/news-release/after-great-recession-americans-are-unhappy-worried-pessimistic-rutgers-study-finds/20140828#.VAcqKaX2LzJ">Rutgers University</a>. Seven in 10 Americans now say the recession's impact is permanent, up from half in 2009 when the recession officially ended. </p>
<p>Despite sustained job growth and lower levels of unemployment, most Americans do not think the economy has improved in the last year or that it will in the next. Just one in six Americans believe that job opportunities for the next generation will be better than theirs have been; five years ago, four in 10 held that view.</p>
<p>Much of the pessimism is rooted in direct experience. Fully one-quarter of the public says there has been a major decline in their quality of life owing to the recession, and 42% say they have lower salary and less savings than when the recession began, while just 30% say they have more. </p>
<p>The public also paints an extremely negative picture of American workers as unhappy, underpaid, highly stressed, and insecure about their jobs. Americans are also pessimistic about the future, and sharply critical of Washington policymakers. Only a quarter think economic conditions in the United States will get better in the next year, and just 40% believe their family's finances will get better over the next year. </p>
<p><B>The Economy gets a downgrade:</B> The updated budget and economic outlook recently released by the nonpartisan Congressional Budget Office (CBO) contained good news about<br />
corporations, but bad news about the rest of the economy. According to Harry Stein of the Center for American Progress, the CBO now estimates that the economy will grow even more slowly than it expected in its previous economic outlook. It now expects that wages and salaries will comprise a smaller portion of that reduced economic pie. </p>
<p>The report suggests that troubling long-term trends in our economy are getting worse. Those trends include the stagnation of middle-class wages, which has gone on for over a decade. In addition, during the last 50 years overall employee compensation – including health and retirement benefits – has fallen to its lowest share of national income in more than 50 years, while corporate profits have climbed to their highest share.</p>
<p>Yet corporations are paying a much smaller portion of the total federal tax burden than they did in the past: about 10% today, vs. 30% in 1953.</p>
<p>While this is not an immediate emergency, since the annual budget deficit is very low right now, deficits will become unsustainable in the future, according to the CBO. </p>
<p>But there is a crisis for middle-class and low-income families right now: stagnant wages are not keeping up with rising expenses. American productivity has increased, but those gains are not making it to low- and-middle wage workers. </p>
<p><B>There has not been a real deleveraging:</B> For several years, media headlines have been filled with references to a “deleveraging,” or a reduction in the level of US debt. But while the US financial system and banks are better capitalized, there has been no deleveraging in the broader economy. Consider these three points, courtesy of BlackRock investment strategist Russ Koesterich:</p>
<p>&bull; US household debt remains high: Thanks to a significant write-off of mortgage debt, the debt burden of US consumers has been modestly reduced. By most measures, however, household debt levels are still too high. The past several years have witnessed a huge surge in student and auto loans. Overall, US household debt still stands at 103% of disposable income.</p>
<p>&bull; Fueled by cheap credit, corporations have been adding new debt. Since the third quarter of 2010, corporate debt has increased every quarter. Over the past six quarters, corporate debt has been growing at an average annualized rate of around 9.5%, well above the pre-crisis average of 7.5%.</p>
<p>&bull; Federal government debt has exploded. Outside of debt held by the Social Security Trust Fund, federal debt has risen by roughly $7.3 trillion over the past six years, an increase of 140%.</p>
<p>The net result is that non-financial debt has actually risen significantly since the financial crisis. Six years ago, notes Koesterich, non-financial debt was around 227% of GDP. Today, it's at a record 250%. </p>
<p>Does rising non-financial debt matter for the economy and for investors? Long-term, the answer is yes: implications include slower growth, a persistent headwind for consumers and vulnerability to even a modest rise in interest rates (this is particularly true for the federal government).</p>
<p><B>This is not a real economic recovery:</B> Wages have been stagnant since the start of the supposed recovery. Real household income has fallen by 7%.</p>
<p>&bull; The S&amp;P 500 has increased 196% in five years; stock market valuations have been higher only three times in history: 1929, 1999, and 2007. But average Americans are not participating in the markets’ gains. They have instead parked record levels of cash ($10.8 trillion) in no-interest bank and money market accounts.</p>
<p>&bull; The economy has added a few million jobs, but 11 million people have permanently left the labor market. </p>
<p>&bull; The Federal Reserve balance sheet was $900 billion before the 2008 financial crisis; today it stands at $4.4 trillion. The correlation between that increase and the stock bubble is self-evident. So is the true purpose of quantitative easing: to save Wall Street, not Main Street.</p>
<p>&bull; The housing market is worse for real people than it was in 2009. The national home price increase — 25% just since 2012 — has been centered in the usual speculative markets, aided and abetted by the Fed’s easy money, managed by the Wall Street hedge funds, and exacerbated by late-arriving flippers, who now account for 34% of all home sales. Mortgage rates have been falling for the past year, home builders have been reporting soaring confidence about the future, and the National Association of Realtors keeps predicting a surge in home buying any minute now. </p>
<p>Yet as analyst James Quinn points out, mortgage applications are in free fall, new home sales are at 1991 levels, and existing home sales are falling. Home prices have peaked and are beginning to roll over.. Home sales will be stagnant for the next decade, he predicts.</p>
<p><B>This will not end well:</B> Crashes are coming, concludes Quinn. Quantitative easing will cease come October, unless the Fed and Wall Street can manufacture a new crisis to cure by printing more money. By every valuation measure, he writes, stocks are overvalued by at least 50%. By historical measures, home prices are overvalued by at least 30%. </p>
<p>Ten-year Treasuries are yielding 2.4%, while true inflation is north of 5%. With real interest rates deep in negative territory, the bond market is even more overvalued than stocks or houses. These simultaneous bubbles have been created by the Federal Reserve in a desperate attempt to keep this debt laden ship afloat. Their solution to a ship listing from too much debt has been to load it down with trillions more in debt. The ship is taking on water rapidly.</p>
<p>We had a choice, says Quinn: “We could have bitten the bullet in 2008 and accepted the consequences of decades of decadence, frivolity, materialism, delusion and debt accumulation. A steep sharp depression which would have purged the system of debt and punishment of those who created the disaster would have ensued. The masses would have suffered, but the rich and powerful bankers would have suffered the most. Today, the economy would be revived… Instead, the Wall Street bankers won the battle and continue to pillage and loot the national wealth while impoverishing the masses.</p>
<p>Discontent among the masses grows by the day. When the stock, bond and housing bubbles all implode simultaneously, all hell will break loose in this country. It will make Ferguson, Missouri look like a walk in the park.” </p>
<p>I fear he may be right; so like I said, I’m uneasy.</p>
<p><i> <a href="http://www.rogerselbert.com/">Dr. Roger Selbert</a> is a trend analyst, researcher, writer and speaker. "Growth Strategies" is his newsletter on economic, social and demographic trends. He is economic analyst, North American representative and Principal for the <a href="http://www.consumerdemand.com/">US Consumer Demand Index</a>, a monthly survey of American households&rsquo; buying intentions.</p>
<p>Flickr photo by Brendan Murphy, <a href="https://flic.k dCFTDB r/p/">The last sunset on earth</a>, taken "somewhere close to the ends of the earth - White Cliffs in NSW".</i></p>
http://www.newgeography.com/content/004521-apocalypse-soon-uneasiness-with-the-economy#commentsFinancial CrisisEconomicsFri, 19 Sep 2014 11:58:01 -0400Roger Selbert4521 at http://www.newgeography.comAre Law School Grads the Future's Paralegals?http://www.newgeography.com/content/004344-are-law-school-grads-futures-paralegals
<p>According to recent figures, in the United Kingdom paralegals already make up (as a mean average) <a href="http://www.lawcareers.net/MoreLaw/Paralegals">44 percent of all fee earners in solicitors firms</a>, and are on track to outnumber solicitors in firms within a decade. In the US, the Bureau of Labor Statistics <a href=" http://money.usnews.com/careers/best-jobs/paralegal">projects a 16.7 percent growth</a> in paralegal jobs between 2012 and 2022, adding 46,200 positions. Jobs for attorneys are expected to grow only about 10 percent during that period. </p>
<p>Before the recent economic downturn, paralegals were either employees looking for further work experience, recent graduates working as paralegals for a short period of time to improve their expertise, or those who specifically wished to pursue a long-term careers as paralegals. Now, a new type of candidate is beginning to emerge: that of the accomplished law graduate who cannot secure a permanent job as a lawyer due to the vast number of suitable candidates. Legal firms are motivated to employ these academically gifted candidates as paralegals, because it means they can get employees who will work diligently for a much lower rate than young lawyers. </p>
<p>Employment vacancies at legal firms are scarce in today's economic climate. A vast number of UK legal graduates now leave university without training contracts. These graduates often seek alternative jobs within the legal profession, such as paralegal work. The situation of US law school graduates improved in 2013, but not by much, says <i>The Wall Street Journal,</i> which <a href=http://online.wsj.com/news/articles/SB10001424052702304834704579401333039241024>reports</a> that things are looking up for the class of 2014, too, though finding full-time work remains a challenge.</p>
<p>Many law school graduates have found themselves in this unfortunate employment predicament. For instance, Bar Professional Training Course graduate Georgina Blower described to <i><a href="http://www.theguardian.com/law/2012/sep/21/law-graduates-paralegal">The Guardian</a></i> how "After finishing bar school without a pupillage in 2009, I got a paralegal job with a car manufacturer in a town outside London. I was one of the lucky ones, with most people on my course struggling to get any sort of legal-related work". Despite being unable to acquire a training contract, Blower highlighted the benefits of working as a paralegal, describing it as "… good general experience... All you can do is keep stacking things in your favour and hope it all pays off."</p>
<p>Fellow graduate Charlotte Dalley offers a similar viewpoint. She graduated from the University of Chester with a 2.1 Law (LLB) degree and since 2013 has been working as a Trainee Solicitor for Gillhams Solicitors. The position has enabled Dalley to assist seasoned partners and more senior associates "with all aspects of private client work including the preparation of wills, probate and the administration of estates," as well as gain "some valuable experience in dealing with residential and commercial property transactions". In this way, paralegal work offers graduates the opportunity to acquire beneficial legal skills from which they can profit in the future.</p>
<p>Even graduates who are fortunate enough to have secure routes to jobs as lawyers can see the benefits of paralegal work for boosting their long term career prospects. Leontia McArdle started working as a paralegal at international firm DLA Piper, despite having already secured a training contract at the firm. She found that; “When I was doing my application forms for training contracts, I thought it would really help if I had more experience in a law firm... I started applying for paralegal positions to confirm my interest and to show it was definitely the career I wanted".</p>
<p>By drawing on examples such as these, <a href=" http://www.theiop.org/careers/from-paralegal-to-solicitor.html">The Institute of Paralegals</a> has been eager to demonstrate the benefits of working as a paralegal for law graduates. Legal firms, they say, prefer training contract candidates who have prior experience, "because the world of full-time, permanent work in a professional environment is something that most trainee solicitors have not previously experienced. They therefore sometimes need a "settling in" as they adjust to life as a worker and not a student. Paralegals have already had gone through that process - at somebody else's expense!".</p>
<p>Ultimately, due to these trends, more legal graduates are seeking paralegal work. So much so that <a href=" http://www.lawgazette.co.uk/practice/law-graduates-flock-to-paralegal-roles/5036926.article">research suggests</a> the number of people working as paralegals may continue to increase in the UK by over 20 percent in the next four years. This is predominantly due to the fact that legal firms are reluctant to hire more junior lawyers, yet the number of law graduates seeking employment continues to increase. In these circumstances, gaining employment as a paralegal permits graduates to work within their chosen field, develop professional relationships with employers and clients, and consolidate their knowledge of various aspects of legal work. All of this can prove beneficial not just while entry-level recruitment is flat, but throughout their long term legal careers.</p>
<p><i>Bradley Taylor is a freelance writer from Derby, England. He enjoys writing across a variety of topics including law, travel and food. Follow Bradley on Twitter @BradleyTaylor84.</p>
<p>Flickr photo by <a href=" https://flic.kr/p/DhcU5">Stephanie Pakrul</a>.</i></p>
http://www.newgeography.com/content/004344-are-law-school-grads-futures-paralegals#commentsFinancial CrisisTue, 03 Jun 2014 01:38:00 -0400Bradley Taylor4344 at http://www.newgeography.comSearching Out The Half-Full Glass http://www.newgeography.com/content/004166-searching-out-the-half-full-glass
<p>There is a shiny, brittle skin to the economic recovery that conceals an unhealthy flesh underneath. It is tempting to call this condition a glass half empty. But seeking the healthy and the fit in nontraditional places has become a quest for more and more Americans who are leading us down a pathway that diverges, from the mainstream towards a new future. Out of earshot of the mainstream media and off of Main Street, there is a glass <a href="http://www.newgeography.com/content/004160-americas-glass-half-empty-or-half-full">half full</a>.</p>
<p>The official storyline of the economic recovery began in 2009 almost as soon as the stock market lost half its value, and masses of unemployed people listened to cheery reports that the recession was over, even as unemployment surged to 10%. With waning confidence in our institutions and leaders to guide us, people seemed genuinely at a loss to define a shared future of abundance and beauty. Since then, insidious corrosion has eaten away our traditional sources of optimism. In a sea change, the focus of many people is slowly shifting away from that glossy promotional veneer back towards person-to-person relationships and rebuilding moral capital one transaction at a time.</p>
<p>For many employees, a fulfilling career is a lost dream, traded instead for salary and benefits. In this phase of the curve it is still an employer’s market, and most employers manipulate the terror over loss of job to their advantage. Working hours are now pretty much 24/7 for many people, taking work home on weekends; answering business emails and phone calls at all hours of the day and night. </p>
<p>Today’s workers are jumpy and work far harder, for less than they had made in the before-times.<br />
Many employers, starved for profit in recent years, finally took what little profit they had in 2013, sharing little or none with the hardworking employees who had helped them to regain their economic footing. Those workers at the top who sweated the worst of it divided meager earnings among themselves, leaving little for the rest of the workforce. </p>
<p>Mainstream America bravely soldiers on, making 2004 wages, but with 2014 expenses. We are presented with more stuff to buy, more media to consume, and more gadgets to worship. Experiences that were once fundamentally outside of the mainstream economy – one’s college years, for example – are now a big business. There seems to be no refuge from the insistent, shrill attempts to monetize everything. It is easy to feel pessimistic and just a little debased, and to begin feeling dissident urges. Under our noses, however, another America lurks. </p>
<p>This is an America which hasn’t bought into the “too big to fail” system, and it has at least two demographic bases. The first is the portion of the millennial generation that has seen the damage done to their elders, and is now waiting it out, sneering at “suits” and instead creating its own economy out of localized, small moves. It operates with a healthy disregard for the establishment system. This group is in its first historical phase of creating its own food and shelter, carefully selecting strains of sustenance from local sources and operating a kind of “starting over” effort at the basic need level of the Maslow hierarchy. Food and shelter first, they reason; rebuilding a new system will come later.</p>
<p>It's a generation that has suffered from what philosopher Henri Lefebvre called the <a href=" http://www.amazon.com/The-Production-Space-Henri-Lefebvre/dp/0631181776">reproduction of the space of production</a> in their youth. This somewhat laborious phrase cites the space of production – the factory floor – as the model upon which all the rest of our space has been molded. School, said Lefebvre, is molded upon the factory floor, where students are taught to memorize and obediently regurgitate facts to their teacher/boss. Business leaders, anxious to produce workers, insist upon teaching to standardized tests, to reproduce the results they expect upon graduation. Education is replaced with being taught the business culture.</p>
<p>What Millennials reject is not so much the establishment itself, but rather the manager-worker relationship that has seeped into every corner of daily life, driven by the pressure for higher profits and faster throughput. What looks to boomers as sloth (because we are conditioned to respect this pace of production) is to them a form of dissent.</p>
<p>It's too soon to tell whether the millennial generation, like the boomers before it, will eventually succumb to the corporate world. Allied with them, however, are the new, immigrant Americans; people who have come to our shores to seek a new place to live and work. To the rest of the world, America is still the land of the free. People are escaping terrible conditions in cities like Cairo, Rio and Istanbul, and even more frustrating powerlessness in cities all around the world. To these new arrivals, many from non-OECD countries, America still represents opportunity. </p>
<p>New arrivals are treated with suspicion by a xenophobic, fear mongering media precisely because they are correctly viewed as not-yet properly conditioned. Those immigrants who buy into the promise of wealth may perpetuate a realm that is corporate-dominated, but many others may not. Our genius is our open borders, and as a nation of immigrants America has always renewed itself with their diversity.</p>
<p>A future of abundance and beauty must begin with small moves: a foundation upon which moral capital can be rebuilt. If integrity and trust can be found in simple transactions between individuals, then progress can indeed be made. It is here that a glass half full can be found, and it is here that the social space of America is being re-made. Dying strip malls are being replaced by farmer’s markets; vacant glass towers are being replaced by warehouse-based laboratory startups and home offices, just to name a few examples. This new generation, and these new immigrants, are proving that America is all right after all, and can rebuild itself without the worst trappings of the 20th century corporate world.</p>
<p>These are small, unglamorous trends. If they occur without “help” from Wall Street or without government regulation, are they dissent? Then so be it. Good people can bring to society a sense of uncorrupted – dare one say humanistic? – values. Our half-full glass should include a re-creation of space on a new model: space modeled not on production, but rather upon a shared and positive vision of the future.</p>
<p><i>Richard Reep is an architect and artist who has been designing award-winning urban mixed-use and hospitality projects, domestically and internationally, for the last thirty years . He is Adjunct Professor for the Environmental and Growth Studies Department at Rollins College, teaching urban design and sustainable development, and is president of the Orlando Foundation for Architecture. He resides in Winter Park, Florida with his family. </p>
<p>Flickr photo by khersee: <a href="http://www.flickr.com/photos/arphot/6221294945/sizes/z/">Warehouse</a> — waiting to be repurposed? </p>
http://www.newgeography.com/content/004166-searching-out-the-half-full-glass#commentsFinancial CrisisMiddle ClassOrlandoFri, 14 Feb 2014 00:38:42 -0500Richard Reep4166 at http://www.newgeography.comSome Implications of Detroit’s Bankruptcyhttp://www.newgeography.com/content/004129-some-implications-detroit-s-bankruptcy
<p>There&rsquo;s been so much ink spilled over Detroit&rsquo;s bankruptcy that I haven&rsquo;t felt the need to add much to it. But this week the judge overseeing the case ruled that the city of Detroit is eligible for bankruptcy. He also went ahead and ruled that pensions can be cut for the city&rsquo;s retirees. Meanwhile, the city has received an appraisal of less than $2 billion for the most famous paintings in the Detroit Institute of the Arts.</p>
<p>A couple of thoughts on this:</p>
<p>First, every city in America should be doing a strategic review of its assets, and moving everything it doesn&rsquo;t want turned into de facto debt collateral into entities that can&rsquo;t be touched by the courts. In the case of the DIA, the city owns the museum and the collection. Hence the question of whether or not art should be sold to satisfy debts. If it were typical separately chartered non-profit institution, this wouldn&rsquo;t even be a question.</p>
<p>At this point, I&rsquo;d suggest cities ought to be taking a hard look at whether they own assets like museums, zoos, etc. that should be spun off into a separate non-profit entity. Keep in mind, the tax dollars that support the institutions can continue flowing to it. But this does protect the assets in the event of a bankruptcy.</p>
<p>In the case of Detroit, it seems inevitable that at least some art work will be sold. Given that worker pensions are going to be cut, it would be pretty tough to say no to selling art. Assuming this is the case, post-sale the museum should be spun off as a separate entity to hopefully reboot its standing the museum world. As the trustees of the group that operates it have been adamantly opposed to any sale, one would hope other museums would not hold any violations of industry standards against them for, particularly if they acquire ownership of the building and artwork away from the city afterward. The city of Detroit doesn&rsquo;t need to be in the museum business anyway. It has bigger fish to fry.</p>
<p>Secondly, public sector employees will have to start rethinking their approach to retirement benefits. The current mindset has been to grab as much as you can anytime you can because the taxpayer will always be forced to cover the promises no matter what. As the actual results in Central Falls, RI and now this show, that&rsquo;s no longer a good assumption.</p>
<p>Detroit&rsquo;s workers don&rsquo;t have lavish pensions as these things go. But they weren&rsquo;t shy about abusing the system either. They in effect looted their own pensions by <a href="http://www.bloomberg.com/news/2013-09-26/detroit-s-pension-madness.html">taking out extra, unearned &ldquo;13th checks&rdquo;</a>. They also used pensions funds to <a href="http://www.bloomberg.com/news/2013-12-02/detroit-retirees-strike-pay-dirt-with-city-guaranteed-savings.html?alcmpid=politics">give a guaranteed 7.9% annual rate of return on supplemental savings accounts</a> workers were allowed to establish. All told these &ldquo;extra&rdquo; payments <a href="http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-cost-detroit-pension-plan-billions/?_r=0">drained about $2 billion out of the pension system</a>.</p>
<p>This was not something the city did through an arm&rsquo;s length transaction. As the Detroit Free Press reported, Mayor Dennis Archer was <a href="http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcy-history-1950-debt-pension-revenue">alarmed by the practice and wanted to stop it</a>. But &ldquo;the city doesn&rsquo;t control its pension funds, which have been largely administered by union officials serving on two independent pension boards.&rdquo; So he tried to amend the city&rsquo;s charter to stop the practice. According the Free Press, &ldquo;Archer backed an effort to block the payments through a proposed new city charter, which actually passed in August 1996. Enraged, several city unions and a retiree group sued and won. Archer tried again to block payments through a ballot initiative, called Proposal T, but it failed.&rdquo;</p>
<p>The unions could brazenly loot their own pension plan because they felt rock-solid assurance that the taxpayers would ultimately be required to make them whole. This bankruptcy is showing that may not be the case after all. It should serve as a warning to unions everywhere not to get too aggressive with their shenanigans.</p>
<p>They&rsquo;ll of course appeal the judge&rsquo;s ruling and may win. But the Michigan constitution says pensions are a contract right. The very definition of bankruptcy is that you can&rsquo;t pay what you&rsquo;re contractually obligated to. Bankruptcy is all about breaking contracts. The bondholders have contracts that are not supposed to be impaired too, after all. I&rsquo;m a fan of local government autonomy as you know, but as Steve Eide <a href="http://www.publicsectorinc.org/2013/11/if-cities-cant-be-free-to-fail-they-shouldnt-be-free-in-the-first-place/">rightly points out</a>, any freedom worth its name is freedom to fail. If cities and their various constituencies don&rsquo;t suffer the consequences of their mistakes, they should be heavily micromanaged from on high.</p>
<p>When individuals fail, we have a safety net (unemployment insurance, for example). Plus we have personal bankruptcy to give people a fresh start. We don&rsquo;t even worry about whether the person is at fault for their own position or not. We provide that backstop regardless. But that backstop doesn&rsquo;t allow people to go on living like they did before as if nothing happened. Similarly, cities in trouble shouldn&rsquo;t be abandoned, but they need to realize that there are genuine consequences for failure. A realization that failure has consequences for pension holders as well as the taxpayer should hopefully promote healthier decisions about how retirement benefits should be offered, funded, and administered.</p>
<p><em>Aaron M. Renn is an independent writer on urban affairs and the <a href="http://www.telestrian.com/">founder of Telestrian, a data analysis and mapping tool.</a> He writes at <a href="http://www.urbanophile.com/">The Urbanophile</a>, where this piece originally appeared.</em></p>
http://www.newgeography.com/content/004129-some-implications-detroit-s-bankruptcy#commentsUrban IssuesFinancial CrisisDetroitPoliticsPolicyTue, 07 Jan 2014 00:38:29 -0500Aaron M. Renn4129 at http://www.newgeography.comManufacturing, Exports, and the R&D X-Factorhttp://www.newgeography.com/content/004075-manufacturing-exports-and-rd-x-factor
<p>A recent visit by President Obama to an Ohio steel mill underscored his promise to create 1 million manufacturing jobs. On the same day, Commerce Secretary Penny Pritzker announced her department’s commitment to exports, saying “Trade must become a bigger part of the DNA of our economy.”</p>
<p>These two impulses — to reinvigorate manufacturing and to emphasize exports — are, or should be, joined at the hip. The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&amp;D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade.</p>
<p>It’s the best shot the U.S. has to energize its weak economic recovery. R&amp;D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide.</p>
<p>The Obama administration is proud of the 2012 increase of 4.4 percent in overall exports over 2011. But that rise hasn’t provided a major jolt to employment and growth rates, because our net exports — that is, exports minus imports — are languishing. Significantly, the U.S. is losing ground in the job-rich arena of exported manufactured goods with high-technology content. Once the world leader, we’ve now been surpassed by Germany.</p>
<p>America’s economic health won’t be strong while its trade deficit stands close to a problematically high 3 percent of GDP (and widening). Up until the Reagan administration, we ran trade surpluses. Then, manufacturing and net exports began to shrink almost in tandem.</p>
<p>Our past performance proves that we have plenty of room to grow crucial manufacturing exports, and even eliminate the trade gap. The rehabilitation should begin with a national commitment to basic research, which in turn boosts private sector technology investment. The resulting rise in GDP would be an important counterbalance to a slightly higher federal deficit.</p>
<p>Just-completed <a href="http://www.levyinstitute.org/publications/?docid=1909">Levy Economics Institute simulations</a> measured how a change in the target of government spending could influence its effectiveness. The best outcomes came about when funds were used to stoke innovation specifically in those export-oriented industries that might yield new products or cost-saving production techniques. When a relatively small stimulus was directed towards, for example, R&amp;D at high tech manufacturing exporters, its effects multiplied. The gains were even better than the projections for a lift to badly needed infrastructure, which was also considered.</p>
<p>Economists haven’t yet pinpointed a percentage figure that reflects the added value of R&amp;D, but there’s a strong consensus that it is significant. Despite the riskiness of each research-inspired experiment, R&amp;D overall has proven to be a safe bet. Government-supported research tends to be pure rather than applied, but, even so, when aimed to complement manufacturing advances, small doses have a good track record.</p>
<p>Recognition that R&amp;D outlays bring quantifiable returns partly explains why the federal National Income and Product Accounts have recently been altered to conform with international standards. NIPA will now treat R&amp;D spending as a form of fixed investment. This will be a powerful tool to help reliably gauge its aftermath.</p>
<p>Private sector-based innovation has also proved to be far more likely to occur when it is catalyzed by a high level of public finance. (For amazing examples, check out this just-released <a href="http://www.sciencecoalition.org/pr.php?id=568">Science Coalition report</a>.) Contractors spend more once government has kicked in; productivity rises and prices drop.</p>
<p>The prospect of a worldwide positive-sum game is far more realistic than the “currency wars” dynamic so often raised by the media. Overseas buyers experience lower prices and the advantages of novel products. Domestic consumers, meanwhile, enjoy higher incomes and more employment, with some of the earnings spent on imports.</p>
<p>An export-oriented approach faces multiple barriers. Anemic economies across the globe could spell insufficient demand. Another challenge lies in the small absolute size of the America's export sector.</p>
<p>But the range of strategic policy options for the U.S. is limited. A rapid increase in research-based exports is the only way we see to simultaneously comply with today’s politically imposed budget restrictions and still promote strong job and GDP growth.</p>
<p>Instead of stimulating tech-dependent producers, though, we’ve been allowing manufacturing to stagnate and competitiveness to erode. Public R&amp;D spending as a percentage of GDP has dropped, and is scheduled for drastic cuts under the sequester.</p>
<p>Sticking with the current plan means being caught up in weak growth and low employment for years. Jobs are being created at a snail’s pace, with falling unemployment rates largely a reflection of a shrinking workforce.</p>
<p>For our R&amp;D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period.</p>
<p>We need this boost. It’s urgent that we bring down joblessness and grow the economy. A change in fiscal policy biased towards R&amp;D shows real promise as a viable way to help rescue the recovery.</p>
<p><i>Dimitri Papadimitriou is president of the <a href="http://www.levyinstitute.org">Levy Economics Institute of Bard College</a>, a professor at Bard, and a widely published economist. His policy positions include a past vice-chairmanship of the Trade Deficit Review Commission of the U.S. Congress. This article originally appeared under the title "The U.S. Economy Needs an Exports-Led Boost," at <a href="http://blogs.reuters.com/great-debate/2013/11/26/the-u-s-economy-needs-an-exports-led-boost/">Reuters.Com</a>. </p>
<p>Photo by Lawrence Jackson: President Obama at the ArcelorMittal Steel factory in Cleveland, Ohio; November 2013.</i></p>
http://www.newgeography.com/content/004075-manufacturing-exports-and-rd-x-factor#commentsFinancial CrisisEconomicsPolicySat, 07 Dec 2013 00:38:00 -0500Dimitri B. Papadimitriou4075 at http://www.newgeography.comViewing McJobs From the Flip Sidehttp://www.newgeography.com/content/003978-viewing-mcjobs-from-flip-side
<p>The headline read, “We Have Become a Nation of Hamburger Flippers: Dan Alpert Breaks Down the Jobs Report.” Seems that Alpert, the managing partner of New York investment bank Westwood Capital, LLC, was unhappy that most of the jobs created in July were for low-wage workers.</p>
<p>Albert wasn’t alone. Plenty of people have been complaining that most of the recently-created jobs have been for low-wage workers. These people have apparently forgotten who it was that lost jobs in the Great Recession: It was low-wage workers. College educated people were hardly impacted at all, especially those that headed households and had several years of work experience. </p>
<p>The recession hit less educated, and therefore low-wage, workers far more than it hit high-human-capital workers, and the discrepancy persists, even as analysts complain about hamburger-flipping jobs.</p>
<p>The July unemployment rate for college graduates was only 3.8 percent, down from 3.9 percent the previous month. By contrast, the unemployment rate for people with less than a high school diploma was 11 percent in July, up from 10.7 percent in June, even though more than 270,000 of these workers left the workforce. </p>
<p>The July unemployment rate for high school graduates without any years of college was unchanged from June at 7.6 percent, while unemployment for those with some college fell from 6.4 percent in June to 6.0 percent in July.</p>
<p>So, even though we are hearing some complaints about the composition of new jobs, college educated people and people with some college were apparently better off at the end of July than they were at the beginning of the month. The less educated were not better off. Indeed, it looks as if many were worse off.</p>
<p>The disparity is worse if you look at labor force participation rates. The rate for people with less than a high school education is only 45 percent. Over half don’t even try to find work.<br />
The labor force participation rate climbs as education increases. It’s 59 percent for high school graduates, 67.3 percent for people with some college, and 75.5 percent for college graduates.<br />
We need more hamburger-flipper jobs.</p>
<p>With an unemployment rate of only 3.8 percent for college graduates, it seems that it would be difficult to fill many more of these jobs. Given the relative unemployment rates, it’s unavoidable that hamburger-flipper jobs will continue to dominate new job numbers.</p>
<p>I calculated how many jobs it would take to create a three percent unemployment rate for everybody. We’d need 870,000 jobs for people with less than a high school education, 1,689,000 high-school-graduate jobs, 1,116,000 for people with some college, and only 417,000 college-graduate jobs.<br />
That’s assuming no change in labor force participation rates. The numbers gets a lot larger if you want to improve labor force participation rates.</p>
<p>Suppose the target was a three percent unemployment rate, and labor force participation for everyone was at the 75.5 percent rate that it is for college graduates. In that scenario, we’d need to create 7,783,000 jobs for people without a high school diploma, 15,421,000 jobs for people with a high school diploma, 8,165,000 jobs for people with some college, and still only 417,000 jobs for college graduates.</p>
<p>A lot has been made of the increasing income inequality in America. Part of it is due to higher wages for higher education. Another major reason is that the percentage of those who are working is smaller among lower-educated people, and bigger among those with more education. We could go a long ways toward reducing American’s inequality by putting more of our least advantaged people to work.<br />
I’d say we need a lot more hamburger flipping jobs, and I’m not about to complain because we are creating lots of them.</p>
<p><em>Flickr photo by <a href="http://www.flickr.com/photos/jeremybrooks/4047375199/">Jeremy Brooks</a></em></p>
<p><em>Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at <a href="http://www.clucerf.org">clucerf.org</a>. A slightly different version of this article ran in the Orange County Register. </em></p>
http://www.newgeography.com/content/003978-viewing-mcjobs-from-flip-side#commentsFinancial CrisisEconomicsFri, 11 Oct 2013 01:38:01 -0400Bill Watkins3978 at http://www.newgeography.comThe Cities That Are Stealing Finance Jobs From Wall Streethttp://www.newgeography.com/content/003753-the-cities-that-are-stealing-finance-jobs-from-wall-street
<p>Over the past 60 years, financial services&rsquo; share of the economy <a href="http://www.csmonitor.com/Business/The-Daily-Reckoning/2012/0515/The-financial-industry-s-growth-is-stunting-everything-else">has exploded</a> from 2.5% to 8.5% of GDP. Even if you believe, as we do, that financialization is not a healthy trend, the sector boasts a high number of relatively well-paid jobs that most cities would welcome.</p>
<p>Yet our list of the fastest-growing finance economies is a surprising one that includes many &ldquo;second-tier&rdquo; cities that most would not associate with banking. <!--break-->To identify the cities making the biggest gains, we ranked metropolitan statistical areas&rsquo; employment growth in the sector over the long-term (2001-12), mid-term (2007-12) and the last two years, as well as momentum.</p>
<div>
<div>
<p>Best Cities for Jobs in Finance Industries</p>
<ul>
<li><a href="http://www.newgeography.com/content/003752-small-cities-finance-jobs-2013-best-cities-rankings">Small Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003751-midsized-cities-finance-jobs-2013-best-cities-rankings">Medium Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003750-large-cities-finance-jobs-2013-best-cities-rankings">Large Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003749-overall-finance-jobs-2013-best-cities-rankings">All Cities</a></li>
</ul>
</div>
</div>
<p><strong>New High-Fliers</strong></p>
<p>Tops on our list among the 66 largest metro areas is Richmond, Va., where financial sector employment has grown an impressive 12% since 2009. This reflects the presence of large banks such as Capital One Financial , the area&rsquo;s largest private employer with 10,900 jobs, and SunTrust Banks , which employs 4,400. The insurer Genworth Financial is based in Richmond, and Wells Fargo and Bank of America also have sizable operations there. Along with the Northern Virginia metropolitan statistical area (an area encompassing the state&rsquo;s suburbs of Washington, D.C., including Fairfax, Arlington, Loudoun and Prince William counties), which is No. 7 on our list, the Old Dominion is quietly becoming a major financial power.</p>
<p>In once-gritty Pittsburgh, which places second on our list, financial services is now the largest contributor to the regional GDP, according to the <a href="http://www.alleghenyconference.org/PDFs/NewsReleases/2013/2013WinsRelease040213.pdf">Allegheny Conference</a>. Long seen as a backwater, the area has begun to lure the kind of highly trained workers used by financial firms, leading Rust Belt analyst Jim Russell <a href="http://www.salon.com/2013/05/22/portland_is_dying_partner/">to joke</a>, &ldquo;Pittsburgh is becoming the new Portland.&rdquo; Financial employment there has grown nearly 7% since 2009. The <a href="http://www.post-gazette.com/stories/business/news/pittsburgh-area-industry-growth-is-lauded-681787/">strongly reviving local economy</a> spans everything from energy to medical technology.</p>
<p>Like Pittsburgh, some of the areas doing well in financial services are also thriving generally. These include such Texas high-fliers as No. 3 Ft. Worth-Arlington, where financial services employment has expanded over 12% since 2007, as well as No. 4 San Antonio-New Braunfels. And it is not real estate that is driving this boom—in Fort Worth, for example, the &ldquo;real estate and rental and leasing&rdquo; sub-sector of financial services shed jobs over the last five years while the &ldquo;finance and insurance&rdquo; subsector expanded almost 20%.</p>
<p>Some metro areas that aren&rsquo;t exactly setting the world on fire are scoring in the financial job sweepstakes. Jacksonville, Fla., ranks fifth on our list and St. Louis, MO-IL ranks eighth. In St. Louis, financial sector employment is up 6.4% since 2007 by our count, and the number of securities industry jobs has increased 85% to 12,000 over that span, according to the <a href="http://online.wsj.com/article/SB20001424127887324296604578177710219203782.html">Wall Street Journal</a>.</p>
<p><strong>What&rsquo;s Driving Dispersion of Financial Services?</strong></p>
<p>The largest traditional financial centers appear to be losing their edge. New York, home to by far the largest banking sector with 436,000 jobs, places a meager 52nd on our list of the cities winning the most new jobs in the sector. Big money may still be minted in Gotham, but jobs are not. Since 2007 financial employment in the Big Apple is down 7.4%.</p>
<p>The next four biggest financial centers are also doing poorly. San Francisco-San Mateo ranks 37th – remarkably poor given that San Francisco placed first overall on our 2013 list of The Best Cities For Jobs. Meanwhile Boston-Cambridge-Quincy ranks 44th (despite notching a strong 17th place ranking on our overall list), Los Angeles-Long Beach is 47th, and Chicago-Joliet-Naperville is 57th.</p>
<p>So what gives here? A key factor is cost-cutting. As firms look to move back office and some sales functions to less expensive locales, the traditional financial centers are losing out. Between 2007 and 2012, New York, Boston, Los Angeles, Chicago and San Francisco <a href="http://www.newgeography.com/content/003387-the-dispersion-financial-sector-jobs">lost a combined 40,000 finance jobs</a>.</p>
<p>In addition to lower rents in the cities that rank highly on our list, workers come cheaper, too: the average annual salary for securities industry jobs in St. Louis is $102,000, according to the <a href="http://online.wsj.com/article/SB20001424127887324296604578177710219203782.html">Wall Street Journal</a>, compared with $343,000 in New York.</p>
<p>This trend is not just limited to the high-profile investment banks and brokerages. Insurance, the quieter and tamer part of the financial services sector (it has roughly the same number of jobs today as it did in 2001 and 2007), has seen an exodus of jobs into these lower-cost regional markets as well. Illinois-based insurance giant State Farm, for example, recently signed mega-leases in Dallas, Phoenix and Atlanta.</p>
<p><strong>Manufacturing And Energy Drive Changes</strong></p>
<p>The <a href="http://globalbalita.com/2013/03/09/is-reshoring-boosting-michigans-economy/">manufacturing revival</a> in the Rust Belt and the Midwest is creating financial sector jobs in midsized cities (those with overall employment totaling 150,000 to 450,000). Tops on that list is Ann Arbor, Mich., followed by Green Bay, Wisc., No. 16 Grand-Rapids-Wyoming, Mich., and No. 19 Madison, Wisc. Among small cities, Owensboro, Ky., ranks first, followed by No. 3 Kankakee-Bradley, Ill., No. 5 Clarksville, Tenn.-Ky., No. 11 Bloomington-Normal, Ill., and No. 13 Michigan City-La Porte, Ind. With low commercial and industrial market costs and available workforces, these regions could prove attractive to manufacturers re-shoring U.S. operations.</p>
<p>The top of the financial services rankings for midsized and small cities is also liberally sprinkled with places where hot energy economies are driving employment in all sectors. The midsized list features Bakersfield-Delano, Calif., in third place, the Texas towns of El Paso and McAllen-Edinburg-Mission in fifth and ninth place, respectively, and No. 10 Lafayette, La. Our small cities ranking includes the Texas towns of Odessa (2nd), Midland (fourth) and Sherman-Denison (10th), and Cheyenne, Wyo. (14th). More economic activity will continue to flow to these regions both as they grow and as their suppliers move closer to reduce costs.</p>
<p><strong>What The Future Holds</strong></p>
<p>Historically financial services clustered in big cities, but increasingly cost is leading financial institutions to focus on smaller metropolitan areas. With the connectivity of the Internet and growth of educated workforces in many smaller metros, it has become increasingly possible for financial firms to locate many key functions outside of the traditional money centers.</p>
<p>Some places can boast advantages beyond just lower costs. Jacksonville, and Miami-Kendall (No. 13 on our big cities list) benefit from the <a href="http://www.prnewswire.com/news-releases/bbt-scott--stringfellow-details-growth-plans-for-southeast-208132511.html">huge demand</a> for financial advisers in Florida. The Sunshine State <a href="http://www.bizjournals.com/jacksonville/print-edition/2012/09/07/national-financial-services-is-on-a.html">ranks fourth</a> in the number of financial advisors, and this seems likely to grow as at least some of the expanding ranks of down-shifting boomers — some with decent nest eggs– head down south to retire or start second careers. This demographic trend could also benefit <a href="http://www.bizjournals.com/phoenix/news/2012/06/12/phoenix-financial-sector-ranks-21st-in.html">Phoenix</a>, which already hosts substantial operations of Bank of America, JPMorgan Chase and Wells Fargo.</p>
<p>Perhaps no low-cost metro area has greater long-term advantages than Salt Lake City, 12th on our list. The unique linguistics skills of the largely Mormon workforce have attracted big financial firms such as Goldman Sachs, who need people capable of conversing in Lithuanian, Chinese or Tagalog. Salt Lake City, with 1,400 employees, is the investment bank&rsquo;s sixth largest location in the world.</p>
<p>&ldquo;We consider Salt Lake a high leverage location,&rdquo; notes Goldman managing director David W. Lang. &ldquo;There&rsquo;s a huge cost differential and you have a huge talent-rich environment.&rdquo;</p>
<p>As we saw in manufacturing and information sectors, the financial services industry appears to be undergoing a profound geographic shift. Once identified largely with such storied locales as Wall Street, Chicago&rsquo;s LaSalle Street or San Francisco&rsquo;s Montgomery, the financial sector — like much of the economy — is dispersing, perhaps even more rapidly. Over time, this could accelerate the process of economic decentralization that has been occurring, fairly steadily, for the better part of a half century.</p>
<div>
<div>
<p>Best Cities for Jobs in Finance Industries</p>
<ul>
<li><a href="http://www.newgeography.com/content/003752-small-cities-finance-jobs-2013-best-cities-rankings">Small Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003751-midsized-cities-finance-jobs-2013-best-cities-rankings">Medium Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003750-large-cities-finance-jobs-2013-best-cities-rankings">Large Sized Cities</a></li>
<li><a href="http://www.newgeography.com/content/003749-overall-finance-jobs-2013-best-cities-rankings">All Cities</a></li>
</ul>
</div>
</div>
<p><em>Joel Kotkin is executive editor of NewGeography.com and a distinguished presidential fellow in urban futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of <a href="http://www.amazon.com/gp/product/0375756515/ref=as_li_ss_tl?ie=UTF8&amp;tag=newgeogrcom-20&amp;linkCode=as2&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0375756515" rel="nofollow">The City: A Global History</a> and </em><em><a href="http://www.amazon.com/gp/product/B005B1BN90/ref=as_li_ss_tl?ie=UTF8&amp;tag=newgeogrcom-20&amp;linkCode=as2&amp;camp=1789&amp;creative=390957&amp;creativeASIN=B005B1BN90" rel="nofollow">The Next Hundred Million: America in 2050</a></em><em>. His most recent study, <a href="http://www.newgeography.com/content/003133-the-rise-post-familialism-humanitys-future" rel="nofollow">The Rise of Postfamilialism</a>, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.</em></p>
<p><em>Michael Shires, Ph.D. is a professor at Pepperdine University School of Public Policy. </em></p>
<p><em>This piece originally appeared at Forbes.com.</em></p>
<p><em>Downtown Richmond photo <a href="https://en.wikipedia.org/wiki/File:City_of_Richmond_Business_District.jpg">by CoredesatChikai</a>.</em></p>
http://www.newgeography.com/content/003753-the-cities-that-are-stealing-finance-jobs-from-wall-street#commentsUrban IssuesFinancial CrisisBest Cities 2013EconomicsHeartlandSmall CitiesFri, 31 May 2013 10:51:35 -0400Joel Kotkin and Michael Shires3753 at http://www.newgeography.comThe Vatican Bank: In God We Trust?http://www.newgeography.com/content/003748-the-vatican-bank-in-god-we-trust
<p>When the cardinals sent billowing white smoke from their conclave and elected Jorge Mario Bergoglio as Pope Francis I, little did the Catholic Church realize that two millennia of ecumenical liturgy might come unraveled on the heresy of offshore banking regulations. Among the many frustrations that drove Pope Benedict XVI to take early retirement was his role as guardian angel of the Institute for the Works of Religion (the formal title for the Vatican Bank), which can no longer get past compliance questions by answering that its beneficial owner is “the Almighty.”</p>
<p>The financial inquisition results, according to <a href="http://www.concordatwatch.eu/showkb.php?org_id=1561&amp;kb_header_id=4231&amp;kb_id=37181"><i>Concordat Watch</i></a>, recently included “...two blows to the reputation of the Vatican Bank... The US State Department for the first time listed the Vatican as potentially vulnerable to money laundering, a notch below those states for which it has solid proof of this.” The second revelation was that banking giant JPMorgan Chase had closed its papal account.</p>
<p>Benedict XVI's day job presumably encompassed giving the sacrament to the bank’s audit committee (made up of cardinals), and among the many attacks against the church the most successful have been those of global regulators who have had little patience accepting Vatican credit on faith.</p>
<p>The bank is located in a tax haven — Vatican City, population 800, with a legal system on tablets — lets its managers come to work in robes and sandals, and has clients that deal in cash gathered on collection plates. Because of this, post-2008 regulators have looked upon the Institute as just another bolt-hole trafficking in black money, if not clearing the accounts of pharmaceutical sinners, bigamists, or Lutherans.</p>
<p>Founded in 1942, at a time when the Catholic Church needed some latitude when transferring money between good and evil, the Institute has operated around the world as the cardinals’ piggy bank. Along with taking the deposits of Sunday’s offerings, it has also handled pay-outs of hush money to abused altar boys and booked advances against papal indulgences.</p>
<p>In response to probing questions from the watchdogs — Who is the ultimate beneficiary? Do you know the source of the funds? — the cardinals who run the bank, sometimes with the help of lay bankers, have only had answers that led to further investigations. </p>
<p>Imagine telling some pencil pusher from the European Central Bank, the Bank of Italy, or the US Federal Reserve that the shareholder of record is “one God in three persons.” </p>
<p>Nor did Benedict XVI find much absolution in the press coverage of his bank, which treated the operation as little different from some Mafia numbers racket. </p>
<p>Take, for example, a recent <i><a href="http://www.nytimes.com/2013/03/10/world/europe/power-struggle-on-reforming-vatican-bank.html?pagewanted=all&amp;_r=0">New York Times</a> </i>article that, in thirty paragraphs, managed to link the bank to the failed Banco Ambrosiano — whose former chairman, Robert Calvi, found eternal salvation in 1982 while hanging from Blackfriar’s Bridge — insurance fraud, front companies, suspicions of money laundering, Cuban payments, and management incompetence. In the last case, for example, the CEO was described as a “German aristocrat,” as if his days were spent quail hunting or chasing Sabine women. </p>
<p>Amusingly, the <i>Times’</i> reporters were unable to distinguish, on a visit to the headquarters, the bank managers from the security guards. (A correction was later published, but no picture of the dapper security personnel.) </p>
<p>Nor did the paper of record show much numeric literacy, summing up the Vatican Bank's accounts, in their entirety, as having in 2011 “20,772 clients, 68 percent of them members of the clergy, and $8.2 billion in assets under its management. The bank has said it has around 33,000 accounts.” </p>
<p>As God’s credit union issuing debit cards and checkbooks to clergymen, it is doubtful that the bank manages $8.2 billion at its discretion for its clients (including 14,124 men and women of the cloth). More likely, the $8.2 billion in “assets” are liabilities, demand deposits due to its clients and not “under management.” I doubt that the average priest has savings at the bank of $400,000 and that the bank is investing such money in stocks and bonds.</p>
<p>Nevertheless, the article varies little from other disparaging accounts about the bank that level charges of compliance heresy, and imply that its senior managers, including the fired president Ettore Gotti Tedeschi, are regulatory apostates. </p>
<p>Part of the reason that the Vatican Bank earns such poor grades from international regulators, not to mention from the US State Department, is because the Institute is believed “vulnerable” to the risk of processing terrorist funds. The belief that the Vatican Bank is funneling money to al-Qaeda says more about the bonfires of the regulators than it does about Catholicism. The Catholic Church historically has had more in common with Homeland repression than it has with fifth columnists. To use the worn phrase, “know your client.”</p>
<p>The degree to which international bank regulation is just an excuse for Regulatus Pax Americana can be discerned in a report by Moneyval — the monitoring committee of the Council of Europe — on the Vatican Bank’s efforts to recite its compliance rosaries. It concludes: “The Holy See has come a long way in a very short period of time and many of the building blocks of a system to combat money laundering and the financing of terrorism are now formally in place.” </p>
<p>Perhaps the reason the cardinals went with Cardinal Bergoglio as their front man is because he looks like the last man at a conclave who would short derivatives, or know how to hedge (either in ecumenical or currency terms) the church’s overexposure to developing markets.</p>
<p>In his first comments on the global financial crisis, the Argentine Jesuit attacked the “cult of money” and “ideologies which uphold the absolute autonomy of markets and financial speculation, and thus deny the right of control to States, which are themselves charged with providing for the common good.” Noble sentiments indeed, but not ones often heard from a bank chairman or a Vatican theologian, especially one wearing a triregnum. </p>
<p>Francis I’s words are a long way from those of a predecessor, Leo X, who in 1513 wrote to his brother, the Duke of Nemours, “Since God has given us the papacy, let us enjoy it.” Or those of Leo’s Medici ancestor, Cosimo the Elder, who in the fifteenth century was approached by an archbishop to stop the clergy from gambling. “Maybe first,” said the Medici banker, “we should stop them from using loaded dice.”</p>
<p>Unfortunately for the Pope and his financial acolytes, many international regulators are out to prove that all banks are processing payments for the devil. In the meltdown's aftermath, a small unregulated bank is unusually suspect, especially when operating in a “sacerdotal-monarchical state established under the 1929 Lateran Treaty” and reporting to an abstract nominee with an ethereal address. Nor can it help that the bank is a market-maker in loaves and fishes.</p>
<p>The best that the new Pope can hope for is that the regulators will dispense with a fiery <i>auto-da-fé</i> and instead accept the bank’s penance of its heresy and apostasy. Maybe the central bankers will allow the Vatican to grant itself an indulgence for all those spiritual options marketed in Sicily? High ranking clergy could even argue that, under the company’s accounting rules (as divined from scripture), origination revenue is recognized when the sin is committed, not when the soul is saved.</p>
<p>After all, running a bad bank — as Citigroup, Bank of America, Goldman Sachs, and many other heathens know — is not a mortal sin. </p>
<p><i>Matthew Stevenson, a contributing editor of Harper's Magazine, is the author of <a href="http://www.amazon.com/gp/product/0970913362?ie=UTF8&amp;tag=newgeogrcom-20&amp;linkCode=as2&amp;camp=1789&amp;creative=390957&amp;creativeASIN=0970913362">Remembering the Twentieth Century Limited,</a><img src="http://www.assoc-amazon.com/e/ir?t=newgeogrcom-20&amp;l=as2&amp;o=1&amp;a=0970913362" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" /></a> a collection of historical travel essays. His next book is Whistle-Stopping America.</p>
<p>Flickr Photo: security personnel in Vatican City, by <a href="http://www.flickr.com/photos/trishhhh/4377683292/">Trishhhh</a></i> </p>
http://www.newgeography.com/content/003748-the-vatican-bank-in-god-we-trust#commentsFinancial CrisisEconomicsEuropeFri, 31 May 2013 01:38:42 -0400Matthew Stevenson3748 at http://www.newgeography.com